Creation of a more powerful, state-run Korea Development Bank draws mixed reactions

Published : May 8, 2014 - 21:05

Updated : May 8, 2014 - 22:08

A woman walks past the Korea Development Bank headquarters in Seoul. (Bloomberg)

After years of unproductive talk of privatization, the government had its reasons to once again take the Korea Development Bank under its wing ― to enhance its policy financing functions.

The launch of the new, powerful state-run KDB, however, may create an awkward situation for other commercial banks as there are reasons to believe it may try to dominate the banking industry and peddle influence.

These concerns have now surfaced in the form of controversy over the title of the incoming KDB leadership.

The revised KDB bill for creating an integrated, state-run KDB that passed at parliament last week calls for the executive board to consist of a chairperson, executive director, directors and auditors. Such a management structure may be common in financial holding firms, but is unconventional for banks. The newly integrated KDB claims that it is “just a bank.”

Under this structure, the role of Hong Ky-tack, current chief of the KDB cluster, would be shifted from financial group chairman to banking sector head, though he would maintain the title of chairman.

This is now triggering speculation that the KDB is ready to build a new hierarchy and flex its muscles among other commercial banks.

The KDB shrugged off the concerns as being groundless, but others believe the bank still considered itself above its peers.

“The KDB must have thought that the chief executive title would put it on the same level as other commercial banks, which it would have found degrading,” said an official of another state-run bank.

The new KDB may only be a bank, in theory, but its financial leverage will be as great as, if not greater than, a holding company, the official added.

“The KDB might also have considered the ‘governor’ title, but it is likely that it avoided the title which called for criticism back in 2009, before it was split into two,” the official added.

In 2009, then-President Lee Myung-bak pointed out that the KDB, together with its “governor” system, was a negative example of authoritarianism. In an aim to disperse its “excessive” power, Lee separated the Korea Finance Corp. from the KDB, promoting the former as a public policy lender and the latter as a private commercial bank.

Currently, the term “governor” in the financial sector is only used to refer to the chief of the state’s central bank, the Bank of Korea.

“(The leadership title) is the KDB’s internal issue and will not affect us directly, in any case,” said an official of a local financial holding group.

“But it is true the KDB seems determined to differentiate itself from other banks and to save face after years of poor performance.”

Last year, the KDB recorded a 1.4 trillion won ($1.4 billion) net deficit, the worst figure since the 2008 global financial crisis broke out.

Under the recently passed bill, the KDB’s banking arm will absorb its holding company, then merge with Korea Finance Corp.

Parliamentary approval was largely expected as the Park Geun-hye administration had repeatedly alluded to the need for a state-operated financial control tower ― the KDB.

“The global financial crisis left us with the lesson that a nation should have a stable government-led market control system in order to seek long-term growth,” said Shin Je-yoon, chairman of the Financial Services Commission.